Key Defense Strategies for Borrowers in DRT Proceedings

The article is written by Sneha Mandal of Heritage Law College, University of Calcutta, B.A.LLB, 4TH YEAR during her internship with LeDroit India

INTRODUCTION: 

Debt recovery issues pose a significant and complex challenge within India’s financial system, impacting both lending institutions and borrowers. To address this, India has established several key legal frameworks designed to streamline debt enforcement. These include the Recovery of Debt and Bankruptcy Act (DRT) of 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and the Insolvency and Bankruptcy Code (IBC), 2016. These laws were specifically enacted to simplify debt enforcement procedures for both creditors and debtors. 

History

The successful implementation of financial sector reforms is critically dependent on the speedy recovery of loans and the enforcement of securities by banks and financial institutions, which have been facing considerable difficulties in these areas. To address these challenges, the Committee on the Financial System recommended establishing Special Tribunals with specific powers to adjudicate such matters and expedite the recovery process.

This action follows earlier efforts; in 1981, a committee had already investigated the legal and other obstacles encountered by banks and financial institutions and proposed remedial measures, including necessary legislative changes.

Before 1993, the recovery of debts was handled by civil courts. However, as the judiciary was already overburdened, this system proved inefficient. Previous legislative attempts to resolve the issue, such as the Relief of Indebtedness Act of 1976 and the Sick Industrial Companies Act (SICA) of 1985, were unsuccessful. Their failure stemmed from procedural delays and weak enforcement mechanisms. Notably, SICA, despite its goal of company rehabilitation, was often misused, allowing companies to avoid their liabilities under the guise of revival. This persistent inefficiency ultimately led to the introduction of the Debt Recovery Tribunal (DRT) Act in 1993.

For many years, high courts have enforced liquidation processes. Nevertheless, the debate over India’s insolvency law has highlighted the need to develop a well – structured system. 

Debt Recovery Act, 1993 

Historically, creditors pursued debt recovery by filing petitions in civil courts. To enhance the efficiency of this process, the Recovery of Debt Due to Banks and Financial Institutions Act (RDBFI Act) was enacted in 1993.

The RDBFI Act applies to both banks and designated financial institutions, covering both secured and unsecured loans. A key reform introduced by this Act was the establishment of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs). This led to the transfer of all existing civil cases involving a debt exceeding Rs 10 lakh to the newly formed DRTs.

The creation of the DRTs addressed the urgent need for reforms, as banks previously had limited power to enforce security interests and seize collateral upon default. This limitation was a significant contributor to the rise of non-performing assets (NPAs). The primary objective of the DRT Act, therefore, was to improve the speed and effectiveness of debt recovery operations.

Debts Recovery Tribunal – Important Features

• The Central Government establishes Debt Recovery Appellate Tribunals (DRATs) to hear appeals against orders made by the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016.
• The Central Government also establishes one or more Debt Recovery Tribunals (DRTs) to exercise the jurisdiction, powers, and authority granted by the relevant Act.

Composition and Appointment

• A DRT consists of a single person known as the Presiding Officer.
• Qualifications for Presiding Officer: A person must be, have been, or be qualified to be a District Judge to be appointed as the Presiding Officer.
• Term of Office: The Presiding Officer holds office for five years from the date of assuming duty and is eligible for reappointment.

Staff

• The Central Government provides the DRT with one or more Recovery Officers and other necessary officers and employees.
• The Presiding Officer exercises general superintendence over the functions of the Recovery Officers and other staff.

Removal

• The Presiding Officer of a DRT or the Chairperson of a DRAT can only be removed from office by an order of the Central Government.
• Removal must be based on the grounds of proved misbehaviour or incapacity following a formal inquiry.

Jurisdiction of the DRT

• The DRT is vested with the jurisdiction, powers, and authority to entertain and decide applications filed by banks and financial institutions for the recovery of debts due to them. 

DEFENCE FOR THE BORROWERS AGAINST THE BANKS BEFORE THE DRT

1. CHALLENGING DRT JURISDICTION

A borrower can contest the validity of the Original Application (OA) by arguing that the Debt Recovery Tribunal (DRT) lacks the necessary jurisdiction. Grounds for such a challenge include:

• The claim amount does not meet the minimum statutory limit.
• The liability in question is not defined as a “debt” according to Section 2(g) of the Recovery of Debts and Bankruptcy (RDB) Act.
• The absence of a valid, legally enforceable obligation.

Key Judicial Precedent:

In United Bank of India v. Debts Recovery Tribunal, (1999) 4 SCC 69, the Supreme Court clarified that the DRT’s jurisdiction is strictly derived from statute and cannot be assumed unless the claim falls precisely within the Act’s definition of “debt.”

2. DEFENSE: VIOLATION OF NATURAL JUSTICE PRINCIPLES

Borrowers may challenge proceedings based on a violation of natural justice, specifically citing:

• Failure to serve notice, or providing defective service of notice.
• Denial of a reasonable opportunity to submit a written statement or evidence.
• The mechanical issuance of ex parte orders without due consideration.

Relevant Case Law:

In State Bank of Patiala v. S.K. Sharma, (1996) 3 SCC 364, the Court established that a violation of natural justice, even in statutory proceedings, invalidates the entire action if it results in prejudice to the party concerned.

3. STATUTE OF LIMITATIONS (BAR OF LIMITATION)

Lenders frequently initiate recovery applications even after the statutory limitation period has expired. Borrowers can contest such applications by invoking the following:

• Applicable Law: Articles 19 and 137 of the Limitation Act, 1963.
• Contesting Acknowledgement: Arguing the invalidity or lack of proof for any claimed acknowledgement under Section 18 of the Limitation Act.

Key Judicial Precedent:

In B.K. Educational Services Pvt. Ltd. v. Parag Gupta, (2019) 11 SCC 633, the Supreme Court unequivocally affirmed that the law of limitation applies rigorously to recovery proceedings and must not be disregarded by tribunals, even though the specific ruling was in the context of insolvency law. 

4. DISPUTED AND UNLIQUIDATED DEBT

Given the summary nature of DRT proceedings, a borrower may argue that the matter is too complex for the Tribunal and requires adjudication by a civil court when:

• The accounts are disputed.
• Interest calculations are arbitrary.
• Penal interest has been imposed unilaterally.

Case Law:

The Supreme Court, in ICICI Bank Ltd. v. APS Star Industries Ltd., (2010) 10 SCC 1, established that the DRT must not act mechanically. It is obligated to scrutinise and determine the legality of the debt being claimed.

5. CHALLENGING UNFAIR LOAN AGREEMENT TERMS

Borrowers have the right to challenge loan agreement provisions that are deemed unconscionable or against public policy. These challenges typically focus on:

• Unilateral or One-Sided Clauses: Terms that disproportionately favour the lender.
• Excessive Interest Rates: Charging unduly high interest.
• Unilateral Alteration of Repayment Terms: The lender changes the repayment schedule without the borrower’s mutual consent.

Supporting Case Law:

In Central Inland Water Transport Corporation v. Brojo Nath Ganguly, (1986) 3 SCC 156, the Supreme Court established a precedent by invalidating unfair and unreasonable contractual terms imposed by a party with a dominant bargaining position.

6. JUDICIAL SCRUTINY OF RBI GUIDELINES COMPLIANCE

Banks are legally bound by RBI directives regarding:

• Asset Classification
• Restructuring
• One-Time Settlement (OTS)

Failure to comply with these binding circulars significantly undermines a bank’s claim in legal proceedings.

Key Precedent:

ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd., (2010) 10 SCC 1

The Supreme Court established that judicial review is permissible for bank deviations from mandatory RBI directions.

7. ABUSE OF PROCESS

Borrowers can argue for an abuse of process when recovery proceedings are initiated under the following circumstances:

• The proceedings are commenced with an ulterior motive (a mala fide action).
• Alternatively, non-judicial remedies have not been utilised.
• The action is intended to harass the borrower.
• The proceedings have started despite ongoing settlement efforts.

Relevant Precedent: The Supreme Court, in K.K. Modi v. K.N. Modi (1998) 3 SCC 573, established that launching proceedings with a hidden, improper motive constitutes an abuse of the judicial process. 

8. BORROWER’S RIGHT TO SET-OFF AND COUNTER-CLAIM

Section 19(6) of the RDB Act grants borrowers the statutory right to:

• Claim a set-off against the debt.
• File counterclaims, provided they arise from the same underlying transaction.

Key Judicial Precedent:

In the case of Nahar Industrial Enterprises Ltd. v. Hong Kong & Shanghai Banking Corporation, (2009) 8 SCC 646, the Supreme Court upheld the borrower’s ability to present counter-claims before the Debt Recovery Tribunal (DRT). 

9. SCRUTINY OF DOCUMENTARY EVIDENCE

To succeed, Banks are under a strict obligation to establish the following:

• Execution of all relevant loan documents.
• Disbursement of the stipulated loan amount.
• Continuity of the borrower’s liability.

Crucially, submitting mere photocopies or documents lacking proper signatures is deemed insufficient evidence.

Key Judicial Precedent:

The Supreme Court in Janki Vashdeo Bhojwani v. Indusind Bank Ltd. (2005) 2 SCC 217 affirmed that facts must be substantiated by a witness with personal knowledge, as the simple act of filing a document does not constitute its proof.

Debt Recovery Tribunal as a Non-Performing Asset.

Despite the establishment of specialised institutions such as the Debt Recovery Tribunals (DRTs) under the Recovery of Debts Due to Banks and Financial Institutions (RDDBI) Act, 1993, banks did not achieve the expected levels of debt recovery.

This shortfall necessitated further procedural reforms aimed at reducing delays in the adjudication process. Consequently, and in line with broader financial reforms that extended the objectives of the RDDBI Act, the government enacted “The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.” The SARFAESI Act, 2002, was specifically designed to minimise the time taken in the adjudication process between banks and their borrowers.

The issue of recovery for banks and financial institutions only arises when a borrower defaults on debt repayment. Upon default, banks are required to classify the account as a “Non-performing Asset” (NPA), following the guidelines set forth by the Reserve Bank of India.

CONCLUSION 

While the Debt Recovery Tribunal (DRT) system is primarily focused on recovery, borrowers retain significant defensive avenues. They can challenge unlawful recovery actions by citing issues such as jurisdictional objections, expired limitation periods, procedural errors, breaches of RBI guidelines, exploitative contractual clauses, and statutory counter-claims. Judicial precedent firmly establishes that the imperative for speedy recovery must never supersede the fundamental requirements of legality, fairness, and due process, even in specialised forums like the DRT.

India has consistently sought to improve its debt recovery framework to balance creditor rights with fair debtor resolution. This evolution spans key legislative measures, from the initial Relief of Indebtedness Act, 1976, through the DRT Act, 1993, and the SARFAESI Act, 2002, culminating in the transformative Insolvency and Bankruptcy Code (IBC) of 2016.

Key Debt Recovery Mechanisms:

• DRT Act: Established specialised tribunals to alleviate the burden on civil courts.
• SARFAESI Act: Empowers secured creditors to enforce claims without mandatory judicial intervention.
• Insolvency and Bankruptcy Code (IBC): This code represents a significant shift towards a creditor-in-control, market-driven, and time-bound resolution framework. Its introduction substantially improved India’s Ease of Doing Business ranking. The IBC is underpinned by a robust institutional structure, clearly defining the roles of adjudicating authorities, the Insolvency and Bankruptcy Board of India (IBBI), and insolvency professionals. Crucially, its non-obstante clause grants it precedence over conflicting laws, a position consistently affirmed by the judiciary.

Challenges and Judicial Clarity:

A persistent challenge remains the inconsistent application of older laws, such as SARFAESI, relative to the newer IBC. While the apex court has permitted parallel proceedings, conflicting rulings from lower courts have created uncertainty. A unified and holistic approach to debt recovery laws is therefore crucial.

Furthermore, it is important to note that the BUDS Act, 2019, created to combat illicit deposit schemes, does not override either the SARFAESI Act or the IBC. The Kerala High Court has clarified that while attachment orders under the BUDS Act are valid, they cannot supersede the rights of secured creditors or an ongoing resolution process under the IBC.

Ultimately, India’s move from a fragmented system to the comprehensive IBC setup underscores its commitment to establishing an efficient and effective credit system.